FBR proposed revamping withholding tax regime, reducing to five rates

FBR proposed revamping withholding tax regime, reducing to five rates

KARACHI: Federal Board of Revenue (FBR) has been proposed to revamped withholding tax regime and reduced the number of withholding tax rates to maximum five.

Overseas Investors Chamber of Commerce and Industry (OICCI) in its proposals for fiscal year 2020/2021 highlighted withholding tax as one of the key irritant for compliant tax payer.

It said that the fact that the ‘collection and deduction of income tax at source (Withholding Agents Perspective) (Taxpayer’s Facilitation Guide)’ on the FBR website is of 51 pages highlights the complexity of the withholding tax regime which has more than 30 tax provisions that need to be followed and 50 different tax rates, applicable on nearly all heads of receipts/payments.

The rate of withholding/advance tax also varies depending upon the nature of transaction, legal/tax status of the parties i.e. company or individual and active or in-active filer.

Moreover, FBR system does not auto populate taxes withheld in the portal to the credit of the beneficiary.

Furthermore, at present FBR has prescribed following categories of withholding tax (WHT) rates under the ITO 2001, for various types of payments and it has become extremely difficult for the person processing payments to be precise and accurate in applying WHT rates and ensure compliance.

The, complexity for the withholding agent has been further compounded after the introduction of active taxpayers list and different rates for an active and non-active filers, the OICCI said.

It recommended that withholding tax regime should be revamped by reducing it to a maximum of five rates for all withholding taxes and the differentiation should be on the basis of active and inactive taxpayers only.

FBR system should be upgraded and all taxes withheld should be auto populated in the portal to the credit of the beneficiary.

Final Taxation Regime should be done away with and all withholding taxes should be available for adjustment and the operations wing of FBR should ensure that all persons whose taxes have been deducted file their tax returns.

Withholding agents should be given incentive in the form of 2 percent tax credit of the amount collected for facilitating the Government.

In addition to the above administrative/streamlining issues, withholding/ advance tax rates on below transactions should be reconsidered.

Withholding tax rate be reduced to 1 percent for all FMCG distributors in line with the withholding taxes applicable on the distributors of cigarette and pharmaceutical products.

Withholding tax rates applicable on services is 8 percent minimum tax regardless of the actual taxable income of the service provider.

The nature of this tax effectively becomes indirect tax and increases the cost of doing business for service providers, hence, tax on services should be made adjustable.

Withholding taxes deducted from payments should be deposited in the Govt. treasury on monthly rather than current requirement of weekly basis.

In case of payments to non-residents, the law requires to deposit corresponding withholding tax amount, seven days before the actual remittance to the non-resident person. The deposit of withholding tax should be aligned to the payment to non-resident due to exchange rate implications.

Withholding tax deduction u/s 153 (1)(a) which is currently considered as minimum tax for all the suppliers (except manufacturers and listed companies) should be made adjustable at least for corporates appearing in active taxpayers’ list

i. Withholding tax under section 153 (1b) be reduced to 3% for all the taxpayers providing

ii. services in line with 18 service sectors as mentioned in sub-clause 2 clause 1 of Division III of Part III of Schedule I. not clear

iii. Withholding agent should be given authority to adjust from subsequent payments, in case of reversal of excess deduction of withholding or where underlying transactions are cancelled, reversed or cases where tax status is updated subject to filing of proper adjustment form/return.